USDA Subrogation

Here’s my story…I bought a home with my ex (fiance at the time) about 5 years ago in Michigan. The original mortgage was for $85,000 with no money down.  My ex was listed first on the home and I was the co-signer.  The bank told us that in order to purchase the home, I needed to be the co-signer.  We were also advised by the bank to get a USDA Rural Development Loan, as it was easy for first time home buyers in areas like ours.

We broke up a few years later and I stayed in the house with my two children.   He was not willing to put the house up for sale or try to negotiate with the bank.  And since I was just technically the co-signer, the bank was not willing to work with me.  I couldn’t afford the mortgage on my own. The mortgage company offered to give me $2500 to move out, so I did.  The bank sold the home for $35,000.  I’ve since paid off my car, credit cards and other debts while trying to move forward in my life.

Recently I received a letter from USDA Rural Development, stating that they paid off the bank the difference between the mortgage owed and the selling price, and I will now owe the USDA $60,000!  The letter states that I have 60 days to declare bankruptcy, start making payments, or they’ll transfer the debt to the IRS or a collections agency. I have not had any other contact with them.
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I have spoken to two lawyers.  The first lawyer said that I should file Chapter 7 Bankruptcy and that my case shouldn’t be a problem.  Since I am currently unemployed and a single mother of two, I have a high debt to income ratio.  The second lawyer said that he wouldn’t file a Chapter 7 for me.  He said that he wasn’t sure if the loan was a dismiss-able debt since it is owed to the government.  The attorney stated that he would first file Chapter 13, and then if it was decided to be a dismiss-able debt, he’d file Chapter 7.

I am only 26 years old and have no way of paying $60,000 for a home that I don’t even have.  Advice please!

Destiny

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Hi Destiny,

Only your attorney can provide legal advice; however, my opinion is that Section 523(a) of the Bankruptcy Code – which defines ‘Exceptions to Discharge’ – does not preclude a USDA loan from discharge in a Chapter 7. 

I wonder if the fact that a bankruptcy attorney makes $3,000 to $4,000 for a 13 and only around $1,000 for a 7 affected the opinion of one of those attorneys.  Things that make you go hmmmm.

Thanks for the questions and hope this helps.

Paul

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.